MutualFunds (1)

7/31/2019 MutualFunds (1)

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Mutual Funds


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Education Earning Years Post Retirement Years

Phase I Phase II Phase III

Age- 22 yrs Age- 60 yrs

Marriage

Child birth

Childs Education

Childs Marriage

Housing

22 yrs 38 yrs 10- 20 yrs

Human Life Cycle


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60Retirement

40Middle Age

27Young Married

22Young Independent

Individual Investor: Life Stages

Earnings

Consumption

Savings

All individuals have a finite period to save for their investment goals


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Value of Money over time

Impact of inflation on monthly

expenses of Rs. 30,000 today

Value of Rs. 100,000 over time

At inflation of 5%

Investors need to beat inflation

30,000

38,288

62,368

79,599

Today 5 years 15 years 20 years

100,000

78,353

48,102

37,689

Today 5 years 15 years 20 years


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OPTIONS FOR INVESTING

Deposit in BankSB, RD, FDs, Locker ;)

Loan a Friend/Relative on Interest

Property Investments Invest in Bullion - Gold, Silver..

Investment in Capital Markets -

- Direct - Equity Share Markets- Debt & Bonds Market

- Indirect - Mutual Funds


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So what are my alternatives?

Fixed Interest Products

Bank Deposits

Corporate Deposits

RBI Bonds

Corporate Bonds

Rates of Return?

Returns Net of tax?

Wont Inflation eat into thereturn?

Returns net of tax/ inflation is poor hedge against inflation

4.54%

1.95%

0.01%

4.54%

2.10%

0.36%

4.54%

2.40%

1.06%

4.54%

2.25%

0.71%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

Bank FD Company FD RBI Bond Co Bonds

Inflation Tax @ 30% Net Returns


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Why Equities

7.47% 7.12%

10.64% 10.27%

18.25%

Inflation Gold G Secs Bank FD Equities

Source : CLSA

Cumulative annualised returns (1980 - 2004)

Equities the most attractiveasset class

Equities produce highest long-term returns


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EQUITIES-RISKY & VOLATALIE

BSE SENSEX IN LAST TWO YEARS


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How To Invest In Equities

Direct Equity

High risk, high return category.

Needs a lot of time & expertise.

Substantial initial capital required.

Mutual Funds

One-Time Investment

Systematic Investment Plan (SIP)


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What is a Mutual Fund?

A Mutual Fund is a trust that pools the savings of a number ofinvestors who share a common financial goal.

Anybody with an investible surplus of as little as a few thousandrupees can invest in Mutual Funds.

These investors buy units of a particular Mutual Fund scheme that

has a defined investment objective and strategy. The money collected is invested by the fund manager in different

types of securities. These could range from shares to debentures tomoney market instruments, depending upon the schemes statedobjectives.

The income earned through these investments and the capital

appreciation realized by the scheme are shared by its unit holders inproportion to the number of units owned by them.


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Brief History First Phase 1964-87

Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. At the end of

1988 UTI had Rs.6,700 crores of assets under management.

Second Phase-1987-1993 (Entry of Public Sector Funds) marked the entry of non- UTI, public sector mutual funds set up by public sector banksand Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC).SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987. At the end of 1993,

the mutual fund industry had assets under management of Rs.47,004 crores.

Third Phase-1993-2003(Entry of Private Sector Funds)1993 was the year in which the first Mutual Fund Regulations came into being, under

which all mutual funds, except UTI were to be registered and governed. The erstwhile KothariPioneer (now merged with Franklin Templeton) was the first private sector mutual fund registeredin July 1993. As at the end of January 2003, there were 33 mutual funds with total assets of Rs.

1,21,805 crores. Fourth Phase since February 2003

In February 2003, following the repeal of the Unit Trust of India Act 1963. UTI MutualFund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions underthe SEBI Mutual Fund Regulations


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GROWTH IN ASSETS UNDERMANAGEMENT


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MUTUAL FUND DATA April 30th,

2009

Category Sales Redemption Asset Under Management

Existingschemes

Total Total as on Apr 30, 2009

as on Mar 31, 2009

Inflow/Outflo

w

B Bank Sponsored 118793 118793 87357 93839 81013 12826

C Institutions 55866 55866 48898 26115 23092 3023

Private Sector & Joint Venture :

Indian 239486 239605 184342 172701 153432 19269

Predominantly Foreign 23329 23329 19571 23843 22857 986

Predominantly Indian 250760 250760 198352 198866 180163 18703

D Total Private Sector 513575 513694 402265 395410 356452 38958

Grand Total(B+C+D) 688234 688353 538520 515364 460557 54807


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Organization of a Mutual Fund


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Regulations Governed by SEBI (Mutual Fund) Regulation 1996

All MFs registered with it, constituted as trusts ( under Indian TrustsAct, 1882)

Bank operated MFs supervised by RBI too

AMC registered as Companies registered under Companies Act, 1956

SEBI- Very detailed guidelines for disclosures in offer document, offerperiod, investment guidelines etc.

NAV to be declared everyday for open-ended, every week for closedended

Disclose on website, AMFI, newspapers Half-yearly results, annual reports

Select Benchmark depending on scheme and compare


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Terminologies Demystified Asset Allocation

Diversifying investments in different assets such as stocks, bonds, real estate,cash in order to optimize risk.

Fund Manager The individual responsible for making portfolio decision for a mutual fund, in

line with funds objective.

Fund Offer Document Document with investment objectives, risk factors, expenses summary, how to

invest etc.

Dividend

Profits given to the investor from time to time.

Growth

Profits ploughed back into scheme. This causes the NAV to rise.


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Terminologies Contd NAV

Market value of assets of scheme minus its liabilities.

Per unit NAV = Net Asset ValueNo. of Units Outstanding on Valuation date

Entry Load/Front-End Load (0-2.25%) The commission charged at the time of buying the fund.

To cover costs for selling, processing

Exit Load/Back- End Load (0.25-2.25%) The commission or charge paid when an investor exits from a mutual fund. Imposed to discourage

withdrawals

May reduce to zero as holding period increases.

Sale Price/ Offer Price Price you pay to invest in a scheme. May include a sales load. (In this case, sale price is higher than

NAV)

Re-Purchase Price/ Bid Price Price at which close-ended scheme repurchases its units

Redemption Price Price at which open-ended scheme


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Type ofMutual Fund

Schemes

StructureInvestmentObjective

SpecialSchemes

Open EndedFunds

Close EndedFunds

Interval Funds

Growth Funds

Income Funds

Balanced Funds

Money MarketFunds

Industry SpecificSchemes

IndexSchemes

SectoralSchemes

TYPES OF MUTUAL FUNDS


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Types of Mutual Fund Schemes By Structure Open-Endedanytime enter/exit

Close-Ended Schemeslisted on exchange, redemption after period of

scheme is over.

By Investment Objective Equity (Growth)only in StocksLong Term (3 years or more)

Debt (Income)only in Fixed Income Securities (3-10 months)

Liquid/Money Market (including gilt)Short-term Money Market(Govt.)

Balanced/HybridStocks + Fixed Income Securities (1-3 years)

Other Schemes Tax Saving Schemes Special Schemes

ULIP


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SPECIAL SCHEMES-EXAMPLE

Funds based on Size of the CompaniesInvested in

Large cap funds:Funds that invest in

companies whose total market cap is aboveRs40bnMid cap funds:Funds that invest in companieswhose market cap is between Rs20-40bn

Small cap funds:Funds that invest incompanies whose market cap is below Rs20bn


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10 REASONS TO INVEST INMUTUAL FUNDS

Expert on your side: When you invest in a mutual fund, you buy into the experience and skillsof a fund manager and an army of professional analysts

Limited risk: Mutual funds are diversification in action and hence do not rely on the performanceof a single entity.

More for less: For the price of one blue chip stock for instance, you could get yourself a numberof units across a number of companies and industries when you invest in a fund!

Easy investing: You can invest in a mutual fund with as little as Rs. 5,000. Salaried individualsalso have the option of investing in a monthly savings plan.

Convenience: You can invest directly with a fund house, or through your bank or financialadviser, or even over the internet.

Investor protection: A mutual fund in India is registered with SEBI, which also monitors theoperations of the fund to protect your interests.

Quick access to your money: It's good to know that should you need your money at shortnotice, you can usually get it in four working days.

Transparency: As an investor, you get updates on the value of your units, information on specificinvestments made by the mutual fund and the fund manager's strategy and outlook.

Low transaction costs: A mutual fund, by sheer scale of its investments is able to carry out cost-effective brokerage transactions. Tax benefits: Over the years, tax policies on mutual funds have been favourable to investors and

continue to be so.


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TAXATION

All dividends declared by debt / equity oriented schemes are tax

free in the hands of the investor

Dividend distribution tax @ 14.1625% for individuals and 22.66%

for corporates under debt oriented schemes

No DDT under equity schemes

Long term capital gain in equity schemesexempt from tax

Indexation benefit available for long term non equity schemes

Equity short term capital gain @10%

STCG in Debt fundsRates applicable for the investor

Deduction of Rs. 1 lac under section 80C


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Risks

Historical analysis Return is remembered, Risk forgotten

Risk = Potential for Harm

Market Risk

Non-Market Risk

Credit Rate Risk

MF Risk = Volatility (fluctuation of NAV) Standard Deviation

Websites give star rating ( basis = risk-adjusted return)


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Growth Dividend

payoutDividendreinvestment

Bonus

NAV 20 20 20 20

Units 100 100 100 100Value (Rs) 2,000 Rs 2,000 Rs 2,000 Rs 2,000

After declaration of dividend / bonus

NAV 20 19 19 18.1818

Units 100 100 105.2631 110

Value (Rs) 2000 1900 2000 2000

Dividend

received incash

- Rs 100 - -

Additionalunits

- 10


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Investment strategies

Systematic Investment Plan (SIP) Invest a fixed sum every month. (6 months to 10 years-

through post-dated cheques or Direct Debit facilities)

Fewer units when the share prices are high, and more unitswhen the share prices are low. Average cost price tends tofall below the average NAV.

Systematic Transfer Plan (STP)

Invest in debt oriented fund and give instructions to transfera fixed sum, at a fixed interval, to an equity scheme of thesame mutual fund.

Systematic Withdrawal Plan (SWP)


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What is a Systematic Investment Plan?

An investment plan to invest a

fixed amount regularly at a

specified frequency say,

monthly or quarterly.

SIP is a simple method of investing used

across the world as a means to creating wealth


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Benefits of SIP

Regular

Investments happen every month unfailingly

Power Of Compounding

Rupee Cost Averaging

Forced saving

Helps you overpower the temptation to spend fully Helps you build for the future

Automated

Completely automated process

No hassles of writing cheque every month

Light on the wallet

Investment amount can be so small that you do not even feel the pinchof it being directly deducted, yet the small amount is powerfully workingtowards your financial security


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Systematic Investing, An Example

9.40

6.936.46

7.578.31

9.108.938.018.12

8.759.35

7.60

23

4567

89

10

Jan-04 Feb -04 Mar-04 Apr-04 May-04 Jun-04 Jul-04 Aug -04 Sep -04 Oct -04 Nov-04 Dec-04

106.39units

154.75units

When the price is highest,you buy the least number of units

When the price is lowest,you buy the highest number of units


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Investing at PeakSIP is the way


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Start Early : SIP

A gap of 5 only years can result in a lot of difference in wealth creation !

Rs. 1000 invested per month @15% p.a. till the age of 60 yrs

4.20 3.60 3.00 2.40 1.80 1.20

148.61

70.10

32.84

15.16

6.772.79

-

20

40

60

80

100

120

140

160

25 30 35 40 45 50

Investment Wealth at 60


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Equity Funds

Diversified equity funds

Index funds

Opportunity funds Mid-cap funds

Equity-linked savings schemes

Sector funds like Auto, Health Care, FMCG etc Dividend Yield Funds

Others (Exchange traded, Theme, Contra etc)


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Errors

Invest in only top performing funds These cannot go wrong

Replicate past performance in future

Appropriate way Right Mix of equity MFs (Top 3-4 funds, may all be mid-cap funds)

Have variety of funds like diversified funds, mid-cap funds and sectorfundsin right proportion.

Beginner- it makes sense to begin with a diversified fund

Gradual exposure to sector and specialty funds.

Look at performance of various funds with similar objectives forat least 3-5 years (managed well and provides consistent returns)

Investing in Equity Funds


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Tired of your savings account?

Extra Cash in savings A/c?? Consider Cash Funds

Liquidity: Savings account wins b/w a savings account and a fixed deposit, no ATM (Now-

Rel Regular Savings Fund)

Safety: Savings account wins All mutual funds are subject to market risks

Returns: Cash funds win Upto about 17.5% return

Performance: Cash funds win Interest rate fluctuations covered by quick maturation

Invest when surplus money in savings a/c based on

expense ratio


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Investing Checklist

Draw up your asset allocation Financial goals & Time frame (Are you investing for retirement? A

childs education? Or for current income? )

Risk Taking Capacity

Identify funds that fall into your Buy List

Obtain and read the offer documents

Match your objectives

In terms of equity share and bond weightings, downside risk protection,tax benefits offered, dividend payout policy, sector focus

Check out past performance Performance of various funds with similar objectives for at least 3-5

years (managed well and provides consistent returns)


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Checklist Contd

Think hard about investing in sector funds

For relatively aggressive investors Close touch with developments in sector, review portfolio regularly

Look for `load' costs Management fees, annual expenses of the fund and sales loads

Does the fund change fund managers often?

Look for size and credentials Asset size less than Rs. 25 Crores

Diversify, but not too much

Invest regularly, choose the S-I-P

MF- an integral part of your savings and wealth-building plan.


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Portfolio Decision

The right asset allocation Age = % in debt instruments

Reality= different financial position, different allocation

Younger= Riskier

Selecting the right fund/s Based on schemes investment philosophy

Long-term, appetite for risk, beat inflationequity funds best

TRAPS TO AVOID

IPO Blur Begin with existing schemes (proven track record) and then new schemes

Avoid Market Timing


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MF Comparison

Absolute returns % difference of NAV Diversified Equity with Sector Funds NO

Benchmark returns

SEBI directs Fund's returns compared to its benchmark

Time period

Equal to time for which you plan to invest Equity- compare for 5 years, Debt- for 6 months

Market conditions Proved its mettle in bear market


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Buying Mutual Funds

Contacting the Asset Management Company directly

Web Site Request for agent

Agents/Brokers Locate one on AMFI site

Financial planners Bajaj Capital etc.

Insurance agents Banks Net-Banking

Phone-Banking

ATMs

Online Trading Account

ICICI Direct Motilal Oswal, Indiabulls- Send agents


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Keeping Track

Filling up an application form and writing out a

cheque= end of the story NO!

Periodically evaluate performance of your funds Fact sheets and Newsletters

Websites

Newspapers

Professional advisor


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Warning Signals

Fund's management changes

Performance slips compared to similar funds.

Fund's expense ratios climb

Beta, a technical measure of risk, also climbs.

Independent rating services reduce their ratings of the

fund.

It merges into another fund. Change in management style or a change in the

objective of the fund.

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